I write this because my friend Tom Brakke is putting together a book. He wrote a series that started with letter to a young analyst.
I have sympathy for those that are starting out in finance. It’s tough. My own route to where I am today was longer than most. In some ways, I have advantages, because I worked inside regulated financial firms, and I saw the pathologies that exist within them. But here was my path:
- Junior Actuary
- Actuary for Annuity Lines
- Investment Actuary for tihe Pension Line
- Investment Actuary for the Annuity Line
- Mortgage Bond Manager, and Risk Manager
- Corporate Bond Manager, advising the Chief Investment Officer on insurance issues.
- Buy-side Analyst of Insurance Companies for a hedge fund
- Chief Research Analyst for a minority broker-dealer
- Principal of Aleph Investments, LLC
Look, it’s tough to be inexperienced. I’ve been there. I really wish I understood the accounting rules, and laws/regulations regarding insurance better, when I was new to my work. That said, I wish the older guys would have handled the issues better, and not made a neophyte deal with tough issues without advice.
It’s hard, but to the extent that you can, think about analytical issues at their most broad and qualitative levels. Anyone can put numbers into a formula, but few can understand what the numbers and formulas mean. Formulas are abstractions, and like all abstractions, they distort reality. The analyst that can adjust the model to reflect reality will be far ahead of the one that “plugs and chugs.”
A Picture is Worth 1000 Words
Let me tell you about one of my greatest failures. My division at AIG had a new CEO, and he was an actuary. We felt like we had lifted from the basement into the stratosphere. I went to the new CEO, and showed him my proposal for crediting rates. Most of the presentation was visual, with many graphs. It was stunning; I walked out of the meeting knowing that I had deeply convinced the CEO.
He was fired the next week by M. R. Greenberg. He did not understand the politics of AIG, and questioned one of Greenberg’s deeply held convictions.
And so, young analysts, you may do superior work, and it ends up being nothing for reasons outside your control. What should you do? Keep up the good work, because most of the time, good work triumphs.
Study the Greats
For what it is worth, I am a lifelong learner. Though I try to develop my own methods, I study the methods of others. There is no “not invented here” attitude at Aleph Investments. Rather, it is more akin to the mid-90s Microsoft motto: “We embrace and we extend.”
I have studied many different types of investors, and many different types of investments. The breadth of understanding can allow you to analyze odd situations, where the rule books may not have opined yet. It is good to be curious, and learn things a jump or two outside your circle of competence. That is what expands your circle of competence, and deepens your knowledge at the core.
Learn the Tools
Even if it just being an Excel expert, learn your tools well. If you can, be the “local expert” on how to get the most out of the common bits of software used for analysis. I still remember the looks on the faces of guys 20 years younger than me as a I showed them how to create deeply nested string functions that solved critical problems in a small space.
Get the CFA Charter and More
It’s not that the CFA Charter confers great knowledge — I drifted through it with little difficulty. Your mileage may vary. But it does give a reasonably balanced treatment of the settled finance literature, while teaching ethics. The ethics part is important.
Many of us want to “make good,” while few want to “do good.” But what if the key to prosperity it putting the client’s interests first? Even on Wall Street, as a corporate bond manager, I looked out for the interests of my brokers. By being willing to help when they were in trouble, it brought me more than enough “good deals” because they wanted to help a friend who wasn’t playing for the last nickel on every deal.
Investing is a people business. Do you make your clients happy? Do you explain to them what you are doing? Do you answer their intermittent questions? Even the dumb ones? If you aim for the good of others, good things will come back to you. It may seem less direct than most marketing, but it is far more sticky.
As Jesus said, inverting Hillel, “Do unto others as you would have others to do to you.” As Buffett said, “Don’t do anything you wouldn’t want to see on the front page of the newspaper.” Jesus was more complete — do what is in the best interests of your clients, and ethical problems go away.
Conclusion
As an acquaintance of mine once said, “This is the greatest game in the world, and they pay us to play it.” True enough, though many of us are in the top decile of ability, we compete against those in the top percentile. It’s a tough world, and the competition means risk-adjusted profits are few. Maybe we should all be wealth managers, sucking alpha out of the tax code, until the government changes the rules.
Be aware that in mid-life you might wonder what good your life has been. Aiding the efficiency of capital markets is a good thing, but it may seem thin relative to jobs that obviously help other people.
A defense to that is managing money for the good of others, and not just for yourself. Modest fees, where you have your own assets invested alongside your clients, is a great thing to do, and assures clients that you care for them.
“Care for them,” those words strike me. Most amateur investors buy near the top and sell near the bottom. We can be their shepherds, holding their hands during the bad times, and telling them to calm down during the good times. We can try to limit their risks so that they do not panic or get greedy.
There is real good to be done people and institutions as an investor, but the first thing to learn is control yourself, and all of your emotions. Once you do that, you can do good things for your clients.
By David Merkel, CFA of Aleph Blog
